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Economic analyses of state aid - English abstract
Economicanalysesofstateaid-Englishabstract
Stateaidandcompetition-economicanalyses
1.Introduction
Inthelast10-15years,therehasbeenanincreasingemphasisontheeconomicconsequencesofstateaid.However,although
theoverallEUlevelofstateaidhasfallenfrom1.7percentatthebeginningofthe1990’estoaround1percentattheendof
the90’es,thetotaluseofresourcesspentintheEUcountriesisstillofaconsiderablesize.
Governments’expensesonstateaidareequallymotivatedbyeconomicandpoliticalconcerns.Fundamentally,threetypesof
stateaidexist:Sectoraid,regionalaidandhorisontalaid.Theformalmotivesforgivingstateaidareoftenverynoble.Thus,
sectoraidisaimedatrelievingtheburdensforsectorsinrecessionbye.g.supportingrestructuringofthesector,reeducating
thesector’slabourforceetc.RegionalaidistargetedagainstdevelopingthepoorestregionsinEurope,creatingthefoundation
forexpansionandmodernisationoftheregionsandtherebycontributingtotheoverallEUgoalofeconomicandsocial
cohesioninEurope.Andhorisontalaidisaimedatreducingmarketfailuresbysubsidizinge.g.environmentalactionorR&D
activitiesinprivatefirms.
However,stateaidalsohassomedetrimentaleffectswhichcanleadtopotentiallylargeeconomiccosts.Stateaidcandistort
competitionandleadtoinoptimaluseofsociety’sresourcesbye.g.supportinganoutdatedindustrialstructureanddelayinga
necessaryrestructuringprocessinfirms.
TheneedforemphasizingbothpositiveandnegativesidesofstateaidisthebackgroundfortheDanishgovernment’sdecision
toperformthorougheconomicanalysesofbothexistingandpotentialnewstateaidschemes.Theambitionistovaluate–if
possibleinmonetaryterms-bothpositiveandnegativeeffectsofstateaid.Thelongtermambitionbehindthisworkisthatan
increasingfocusonbothpositiveandnegativesidesofstateaidwillleadtobetterstateaidschemes.Thus,stateaidshouldin
thefuturesecurethelargestpossibleeffectfortaxpayers’moneyandwiththesmallestpossibledistortionaryeffectson
competition.
TheambitiontoincreasetheuseofeconomicanalysesofstateaidisinaccordancewiththeworkintheEUCommission.During
theDanishEUchairmanschipintheautumn2002,theDanishMinisterofEconomicandBusinessAffairswillbededicatedto
implementingtheDanishideasintheEUsystem.AcoordinatedEUeffortwillminimizethedistortionaryeffectsoncompetition
duetostateaid.
OneimportantsteptowardsincreasingopennessandtransparencyconcerningstateaidistheestablishmentofapublicEU
stateaidregister.Astateaidregisterwillenablefirmstoacquireknowledgeofpotentiallydistortionarystateaidpaidto
competitors.TheDanishgovernmentwillactivelysupporttheimplementationofacommonEUstateaidregister.
2.Economicanalysesofstateaid
TheDanishMinistryofEconomicandBusinessAffairshascommencedtheworkonimprovingpolicymakers’foundationfor
makingdecisionsbyundertakinganumberofcasestudiesonexistingorearlierstateaidschemes.Consequently,theanalyses
undertakensofarareexpostanalyses.However,experiencefromexpostanalysesleadstosomegeneralconclusionsaswellas
ageneralmethodologythatwillbeusefulinfutureexanteanalyses.Inthelongterm,itistheambitionthatallnewstateaid
schemesshouldbecarefullyanalysedatanearlystageinthedecissionprocess.Suchanalysesshouldpointatpossible
detrimentaleffectsofagivenstateaidschemeaswellasanassessmentofthescheme’ssuitabilityforsolvingtheproblemin
question.Thisshouldleadtobetteraidschemesandforcepolicymakersandplannerstoconsideralternativeregulatorysteps
otherthanstateaid.Inshort,"lessaidbutbetteraid".
Thenegativeeffectsofstateaidare:
Distortedcompetition
Excessiveprofits
Excessivewages
Lowproductivity
Outdatedindustrialstructure
Directcosts,administrativecostsanddistortionarytaxes
Distortedcompetition
Stateaidoftendistortscompetitionbygivingsomefirmsacompetitiveadvantageoverothers.Thisenableslessefficientbut
subsidizedfirmstowinmarketsharesfrommoreefficientfirms.Theeffectofthisisthattotalproductionislessthanwhat
wouldbepossiblewithamoreefficientuseofsociety’sresources.
Excessiveprofits
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Economic analyses of state aid - English abstract
Thereisariskthatstateaidendsashigherprofitsinthesubsidizedfirmsandsectorswithoutsolvingthestructuralproblems
originallyintended.Excessiveprofitsduetostateaidleadstoexcessiveinvestmentsinsubsidizedsectorstherebydistorting
investmentpatterns.Theconsequenceisthattoomuchcapitalandlabouristiedupinsectorscomparedtowhatwouldbe
optimalinanunsubsidizedmarketequilibrium.
Excessivewages
Stateaidbearstheriskofleadingtohigherwagesinsubsidizedfirmsandsectorsthaninother,unsubsidized,firmsand
sectors.Thismeansthatwagesarepotentiallyhigherthanthelevelcorrespondingtoworkers’productivity.Attheoverall
societylevel,thisimplicatesdistortedlabourmarketswherefirmsoperatingonmarketconditionsexperiencedifficulties
attractingworkerspaidatmarketwages.Theconsequenceisthatlabourisfixedinlessefficientfirmsattheexpenseofmore
efficientfirms.Thishasoverallsocialcosts.
Lowproductivity
Stateaidcanleadtoageneral"slack"inproduction,lackofcostcontroletc.Thereisariskthatstateaidcandelaynecessary
renewal,innovation,productdevelopmentandleadtolowerproductivitygrowth.Inthelongrun,stateaidcantieresourcesin
unproductivefirmsandsectors.
Outdatedindustrialstructure
Stateaidcansupportanindustrialstructurewithmanysmallfirms.Suchastructuremightbepreferablefromane.g.regional
perspective,butatthesametimecouldcollidewiththepotentialforeconomiesofscalebyconcentratingproductiononfewer
plants.Economiesofscalemightleadtolowerproductioncostsandinthelongerrunmakeresourcesavailableforother
sectors.
Directcosts,administrativecostsanddistortionarytaxes
Stateaidmeansbothdirectandadministrativecostsforthepublicfinances.Ontopofthis,stateaidalsoleadsto
administrativecostsintheprivatesector.Financingpublicexpensesleadstohighertaxeswithpotentialdistortionsone.g.
laboursupplyandinvestment.TheDanishMinistryofFinanceestimatesthesocialcostoftaxationtobe20percentofthetotal
taxrevenue.Theseextracostsshouldbetakenintoaccountwhendecidingwhethertoimplementastateaidscheme.
Economicanalysesaddressseveralproblems
Ideally,economicanalysesofstateaidshouldaddressalltheseproblems.Thetoolboxforsuchanalysesbuildsonthemethods
developedforanalysingcompetitionproblemsandeconomicanalysismethodsingeneral.Evidently,thedatausedforsuch
analyseswillbelimitedbythedataavailable.
3.Threecasestudies
TheDanishMinistryofEconomicandBusinessAffairshasperformedcarefulanalysesofthreestateaidschemesrepresenting
respectivelysectoraid,regionalaidandhorizontalaid.Thethreeschemesare1)shipbuildingsubsidies,2)transportaidto
firmsproducingontheislandSamsoe,and3)subsidiestofirms’investmentinenergysavingtechnology.
Danishaidtoshipbuilding–anexampleofsectoraid
AlmostallDanishsectoraidhasbeenchannelledtotheshipbuildingindustry.However,asmostoftheworld’sshipbuilding
countriessupporttheirnationalshipbuildingindustries,shipbuildingaidisoftenconsidereda"defensive"stepbynational
authorities.IntheEUthisareaisregulatedbytheCommission’scommonstateaidrules.TheanalysesofDanishshipbuilding
aidhavebeenperformedinthelightofthissituation.
Theconclusionoftheanalysisisthat-inspiteofmassiveaid-turnover,employmentandthenumberofshipyardsfor
buildingnewshipshasbeendecliningthroughthelatestdecades.Parallelwiththis,publicsubsidies’shareofwageshasbeen
increasingtoalevelofmorethan70percentin2001.
Theinternationalshipbuildingindustryhasalargeovercapacitycomparedtotheneedfornewbuiltships.Thus,shipyard
closureshavebeenexpected.InDenmark,theshipbuildingaidhasprolongedtheprocessofclosingdownshipyards.
ThequestionwhetherDanishshipbuildingaidhashaddistortionaryeffectsoncompetitionremainsunsolved.Themainpart
oftheworld’sshipbuildingisstillsubsidizedinsomeway.
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Economic analyses of state aid - English abstract
However,theanalysespointtosomeunfortunateeffectsonproductivityandwagesintheshipbuildingindustryinDenmark.
Overaperiodof35years,productivityatDanishshipyardshasincreasedwith20percentlessthantherestofthe
manufacturingindustry.Thus,shipbuildingaidhasdelayedtheindustry’sneedsforrationalisationandinnovation.
Moreover,wagesforworkersatshipyardshavebeen8-20percenthigherthanforotherworkersinthemetal-andiron
industryinthesameregions.Thehigherwagelevelcanapparentlynotbeattributedtoahigherproductivityinshipbuilding–
onthecontrary.Buthigherwagesinshipbuildinghasdistortedthelabourmarketformetal-andironworkersby
deterrioratingotherfirms’andsectors’chancesofhiringmetal-andironworkers.
ProfitsinDanishshipbuildinghavebeenlowformanyyears.Thishasbeenreflectedinthenumerousshipyardclosures.Thus,
stateaidhasn’tbeenchannelledintoexcessiveprofits.ButthereisnodoubtthattheownersoftheDanishshipyardshave
beenbetteroffwiththanwithoutstateaid.
Inthedebate,ithasoftenbeenstatedthatshipbuildingaidhaslargeindirecteffectsone.g.employmentinotherindustries.
However,input-outputanalysesshowthatoneextrapersonemployedatashipyarddoesnotleadtohigherindirecteffects
thanoneextrapersonemployedinothersectors–onthecontrary.
Animportantaspectwhenconsideringwhetherornottogivestateaidistheconsequencesifthestateaidhadnotexisted.By
usingDanishofficialregistersforemployment,itisshownthatmostoftheworkersdismissedfromshipyardsinthepast5-10
yearsfoundnewjobsafterarelativelyshortperiodoftime(1-2years).Ofcourse,thisresultshouldbeseeninthelightofthe
Danisheconomybeinginafavourablestageinthebusinesscycleinthesameperiod.However,thisdevelopmentalso
illustratesthatitmakessensetophaseoutstateaidschemeswhentheeconomyisgoingthroughperiodsofeconomicboom.
TransportaidtofirmsproducingontheislandSamsoe–anexampleofregionalaid
Inthelasthalfofthe1990’es,theDanishgovernmentranaschemetargetedatcompensatingforextratransportcostsfor
firmsoperatingontheislandSamsoe.Thus,subsidieswerepaidwhengoodswereferriedtotheislandformanufacturingin
Samsoefirms,andsubsidieswerepaidwhengoodswhereferriedawayfromtheislandagain.
ThesubsidyschemewasconstructedtocompensateonlyforextratransportcostsforSamsoefirms,butthereisnodoubtthat
theoverallaimoftheschemewastosecurefirmsandjobsstayingontheisland.Thelackofexplicityinformulatingtheprecise
goalsforthisschememakesitdifficulttoevaluatewhethertheschemehasbeensuccessful.Theschemehasindeed
compensatedforextratransportcostsduetoferryfairesandtimespentonwaitedforandontheferry.However,thereare
otherextracostsconnectedtoproducingonasmallislandlikeSamsoe.Itisdifficulttobenefitfromeconomiesofscaleasboth
theproductioncapacityinphysicaltermsandthelaboursupplyislimited.
Evaluatingwhethertheaidschemewasasuccessalsodependsonthetimeperspective.Theanalysesshowthatfirmskept
producingwhilesubsidieswerepaid.Whentheaidstoppedin1999,thelargestplantsonSamsoestoppedoperating.Thus,
theaidschemeonlymaintainedindustryandemploymentontheislandforashortperiod,butitdidn’tcontributetoamore
futureorienteddevelopmentontheisland.Thenaturalquestiontoaskiswhetherthe5½millionEurogivenoverfiveyears
couldhavebeenspentonbetterandmorelong-terminitiatives.Futureregionalaidschemesshouldaimatsupportinglocal
industrieswiththepotentialofoperatingonmarketconditionsafteracertainperiodoftime.
Subsidiestoenergysavinginvestmentsandvoluntaryagreements–anexampleofhorizontalaid
In1993,DenmarkimplementedaCO2 taxonenergyuseinindustriesandhouseholds.Atthesametime,theDanish
governmentintroducedsomecomplementaryinitiatives.Theseinitiativesaimatpromotingfirms’incentivestoundertake
energysavings.Themostimportantinitiativesweresubsidiestoenergysavinginvestmentsinindustriesandsubsidiestocover
CO2taxesincertainfirms(voluntaryagreements).Thetwosubsidyschemesbothhadtwomaingoals.Thefirstmaingoalwasto
reducetotalenergyusethroughsubsidisationtowardslessenergyintensivefuels.Thesecondmaingoalwastopartly
compensateDanishfirmsfortheCO2 tax’sdetrimentaleffectsonDanishindustries’internationalcompetitiveness.The
analysesfocusmainlyontheinvestmentsubsidyschemeasthisschemehasbeenthemostcostly.
Severalanalysesindicatethatbothsubsidyschemeshavecontributedtothefirstgoal-reducingindustrialenergyuseand
CO2 emissions.Fortheinvestmentsubsidies,thisquestionhasbeenanalysedinseveraldifferentways.Oneanalysis,which
buildsoninformationgivenbythefirmsontheamountofenergysaved,concludesthatthereductioninfirms’energyuseis
0.5kgpersubsidyDKr.Anotheranalysisperformedonmicrodataforfirms’actualenergyuseestimatesanenergyreduction
of0.2kgpersubsidyDkr.
Thus,mostanalysesestimatethatinvestmentsubsidieshaveliveduptotheiroverallgoals.Buttheyalsopointatsomerather
highshadowpricesforenergyreductionsfinancedbyinvestmentsubsidiescomparedtootherinstrumentsase.g.auniform
CO2 taxoraCO2 quotasystem.Investmentsubsidiesarearelativelyexpensivewaytoundertakeenergysavings.However,the
subsidyschemewasinfactbuilttomitigatethenegativeconsequencesofauniformCO2 taxonfirms’international
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Economic analyses of state aid - English abstract
competitiveness.Consequently,theinvestmentsubsidyscheme’slackofcosteffectivenesswasmostlikelyanticipatedand
politicallyacceptedandwanted.Theanalysesalsosuggestthatcosteffectivenessofthevoluntaryagreementschemehasbeen
comparablewithe.g.auniformCO2 taxoraCO2 quotasystem.
Overall,thetwosubsidyschemeshaveachievedtheirtwogoals.However,thestateaidelementsoftheCO2 packagedonotall
liveuptoachievingtheDanishCO2 goalatthelowestpossiblesocialcost.
Surveybasedanalysesestimatetheamountoffreeriding,i.e.subsidisinginvestmentswhichthefirmwouldhaveundertaken
withofwithoutthesubsidy,toaround20percent.Thisfigureisbasedonarecentsurveyofinvestmentbehaviouramong
subsidizedfirms.Itislikelythatfirmstendtoanswersuchquestionsinastrategicmannerinordertoavoidbeingblamedfor
havingreceivedsubsidiesforinvestmentsthattheymighthaveundertakentheinvestmentsafterall.Butthefirmsalso
emphasizethatthesubsidizedinvestmentshavehadotherpositiveeffectsapartfromenergyreductions,i.e.improved
productionandworkingenvironment.Theseothereffectsmightenhancetheriskoffreeriding.
Thecombinationofaninvestmentsubsidyscheme,voluntaryagreementsandsubsidiestopayingCO2 taxesforcertainfirms
andindustrieshavecontributedtothesmallneteffectsonDanishfirms’competitivenessofthetotalCO2 package.Thenet
effectoftheCO2 packageonDanishindustriesisonlysmall.
BearinginmindthatthetwosubsidyschemeshavebeenpartofalargeCO2 package,thereisnoindicationofthesubsidy
schemesleadingtonegativeeffectsoncompetition.Comparedtointernationalproducerswhohavenotbeensubjectedtoa
CO2 tax,thesubsidieshavenotdistortedinternationalcompetition.CompetitiononDanishmarketsforcomparablegoodshas
notbeendistortedbythesubsidyschemeseither.Inprinciple,allDanishfirmshavebeenabletobenefitfromthesubsidy
schemes.
Thecostoftheinvestmentsubsidyschemeamountedto1.8billionDkr.fortheperiod1996-2000.Thisisalargesumwhich
callsforconsideringtheoverallsocialcostsoftheDanishCO2 policyandtheneedforfindingthemostcosteffectivesolutionto
meetingtheDanishCO2 target.
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